Over the past few weeks a debate has erupted over the true state of the economy. This debate will undoubtedly be further fuelled by the review of the state of the economy that the Federal Reserve released yesterday, its so-called Beige Book. In it, the Fed showed that the economy expanded in many sectors, including manufacturing. Thus, the Fed’s report reiterates that after experiencing the first "job loss" recovery since the Great Depression in the first two years of the recovery, economic and job growth accelerated in recent months.

But what the Beige Book does not show is that many problems still persist. For instance, the economy still has 1.2 million fewer jobs than at the beginning of the recession and the manufacturing sector, which bore the brunt of the "job loss" recovery, is still 2.5 million jobs behind where it was more than three years ago. The danger in taking a short-term and aggregate view of the economy is it will lead to erroneous conclusions. As a result, manufacturing, for instance, may not receive the attention it deserves just because the sector is growing again and has stopped losing jobs.

Why should we care about what happens to manufacturing? Because manufacturing plays a central role for the health of the U.S. economy. Currently, manufacturing is more productive, has larger employment spill-over effects, pays higher wages, and provides more benefits than other sectors of the economy. Moreover, if the U.S. economy wants to shrink its near-record trade deficit by increasing exports, it needs to rely heavily on the manufacturing sector since about 70 percent of trade is in manufactured goods.

Despite playing such a crucial role for the U.S. economy, manufacturing has suffered worse than any other sector in this recovery. Total employment in manufacturing declined for 42 straight months starting in August 2000. Over almost three and half years, manufacturing shed 3 million jobs. Job losses accelerated when the U.S. economy entered a recession. From March 2001 to January 2004, manufacturing lost 2.6 million jobs. And, despite recent job gains, manufacturing still had 1.4 million fewer jobs in May 2004 than at the beginning of the recovery.

Against, this backdrop the new found strength of the manufacturing sector is certainly welcome news, but it does not tell the full story. The Fed claims in its Beige Book that the manufacturing recovery is broad based. This merely means that most industries are expanding. It does not mean, though, that all industries are expanding equally quickly. Neither does it mean that the sector is out of the woods yet, particularly given the long decline that preceded the recovery over the past few months. Industrial production in manufacturing grew by 6.2 percent from June 2003 – its low point – to May 2004. But once computers, communications equipment and semiconductors are excluded, growth was 4.9 percent. In contrast, these IT-related sectors expanded by 27.5 percent over the same period.

Importantly, last year’s gains in manufacturing barely erased the losses it had seen before then, while the gains in IT-related sectors continued a solid expansion. Compared to the start of the recession, industrial production in manufacturing was up by 3 percent. But when IT-related industries are excluded, the growth slows to 0.5 percent for the same period. In contrast, growth in the IT-related sectors totaled 50.8 percent since the start of the recession.

But increased production does not automatically mean more employment. After all, the manufacturing sector is still down from where it used to be in employment, even as its production levels are up. And the employment losses are widely shared. The majority of manufacturing industries, 14 out of 21, shrank by more than 10 percent from the beginning of the recession to May 2004, and more than one third shrank by more than 15 percent during this period. Only one industry, food production, saw its employment decline by less than 5 percent over this period.

The recent gains in manufacturing employment, though, can at best be described as tentative. From January 2004 to May 2004, manufacturing employment grew by 0.6 percent, compared to total employment growth of 0.8 percent. And employment actually declined in one third of manufacturing industries during this time. That is, even when manufacturing employment began growing again, its job growth has been weaker than in the economy overall during the same time period, and many industries — such as printing, paper products, and electrical equipment — were left behind.

The Fed is correct in its assessment of the past few months that the manufacturing sector is growing. But such a short-term view does not paint the full picture of the state of this vital sector. A more detailed view over time and across industries shows that manufacturing still has a long way to go before serious public policy attention is no longer warranted.

Christian E. Weller is a senior economist at the Center for American Progress.




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Christian E. Weller

Senior Fellow